Estate Planning And Trusts Trust Basics And The Impact Of New Laws
Trusts can offer a wide array of financial protections. In addition to easing the transfer of assets and allowing a great level of control over which taxes are applied to transfers, using a trust as part of an estate plan can also protect assets from creditors.
In addition to these benefits, a trust can also offer the creator ease of mind by providing financial assistance to minor children or family members who may not be experienced with asset management. These advantages make the use of a trust beneficial for many individuals.
Setting up a trust
Before establishing a trust, it is important to determine which type is best for your expectations and financial situation. There are two main types of trusts: living trusts and testamentary trusts.
A living trust is set up during the creator’s lifetime and can be either revocable or irrevocable. A revocable trust allows changes to be made to the trust’s structure, while an irrevocable trust cannot be changed. Although revocable trusts allow for some flexibility, they often do not provide the same tax benefits as irrevocable trusts.
A testamentary trust is set up to begin at the time of the creator’s death. This type of trust is generally established in the creator’s will.
Trusts can be designed to carry out variety of goals. One popular use is the ability to provide money to loved ones while simultaneously protecting it from their potential future creditors. This provision is referred to as a spendthrift provision.
Other provisions can allow for the care of disabled children or grandchildren, can allocate money to be used specifically for education or even, in some circumstances, the care of a pet.
Once a trust type is chosen, the creator must appoint a person or entity, called a trustee, to manage the trust. The trustee could be a family member or a lawyer; the entity could be a trust department within a bank. The creator must also choose a beneficiary, or the person who will benefit from the trust. The beneficiary could be the creator or another person, depending on the type of trust used.
Once these basics are determined, it is also important to discuss how the trustee will manage the money within the trust and how the assets will be divided and used.
Potential future changes and how they may impact trusts
After a trust is established, it is important to review it from time to time. Estate laws are constantly changing, and these changes can impact the assets held within the trust.
For example, current law allows a taxpayer to provide another person with about $5 million in tax-free gifts. The estate and gift tax laws that allow for this generous transfer are set to expire in January 2013, however. At that time, the tax-free transfer amount may drop to $1 million per person.
If this change occurs, some individuals may want to adjust their estate plans. If one is already giving over the potential $1 million limit in gifts per person, it may be advantageous to give a smaller amount in gifts and establish a trust with the remaining assets.
Even if this dramatic drop does not take place, financial planners predict another one may be in the works. One example they point to is a plan favored by President Obama, which leans toward a reduction from the current $5 million exemption amount to $3.5 million per individual.
Regardless of which figure is enacted, one thing is certain: Estate and gift tax laws are always evolving. As a result, it is important to review the structure of the trust with an experienced estate planning lawyer to better ensure your wishes are met.